Ford Shares the Wealth

Learning from the market’s past to understand its present.

Henry Ford's legacy rests as much on his treatment of workers as on innovations such as the assembly line and the Model T. That legacy took much of its shape on Jan. 5, 1914, when Ford(NYSE:F) implemented a set of extremely generous benefits for its workforce. It was "one of the most remarkable business moves of [Ford's] entire remarkable career," according to The New York Times.

Ford's factory would thereafter be run on a continuous 24-hour schedule using three eight-hour shifts, rather than the previous 18-hour schedule that used two nine-hour shifts. These workers received one of the largest companywide pay increases of the entire industrial era, which brought the minimum daily pay up to $5 from the previous minimum of $2.34. "Even the boy who sweeps up the floor will get that much," the Times wrote. This was a strong salary in 1914 -- the equivalent of an hourly salary of $14.40 today. The rate looks even better when compared with contemporary wage-earners. The pay raise brought Ford employee salaries in line with those of skilled and unionized carpenters and plumbers of the day and was more than double the average income in 1914.

Ford's largesse went further. Nearly every employee would share in a $10 million bonus pool for 1914, which meant an average bonus of $385 for approximately 26,000 employees, including new hires necessitated by the 24-hour factory schedule. That works out to 77 extra $5 workdays.

Statements from Ford Treasurer (the old-timey equivalent of today's CFO) James Couzens would shock many present-day executives who now focus almost exclusively on profit maximization at all costs:

It is our belief that social justice begins at home. We want those who have helped us to produce this great institution and are helping to maintain it to share our prosperity. We want them to have present profits and future prospects. Thrift and good service and sobriety, all will be enforced and recognized.

Believing as we do that a division of our earnings between capital and labor is unequal, we have sought a plan of relief suitable for our business. We do not feel sure that it is the best, but we have felt impelled to make a start, and make it now. We do not agree with those employers who declare ... that "movement toward the bettering of a society must be universal." We think that one concern can make a start and create an example for other employers. That is our chief object.

Ford himself promised that the only grounds for firing would be unfaithfulness or ineptitude. As long as employees remained loyal and didn't shirk their duties, they would be given ample opportunity to remain with the company, even in periods of potential economic distress.

This share-the-wealth strategy has been called "the virtuous circle of growth." Ford's employees, at their new wages, could fully afford a new Model T after working for about 18 weeks. Sales soared -- more than 100,000 more Model Ts sold in 1914 than had been sold the year before.

Ford's new policies caught on among other executives as well. Frank W. Abrams of Standard Oil of New Jersey, which is now ExxonMobil(NYSE:XOM), expressed his belief in stakeholder capitalism by later writing that "the job of management is to maintain an equitable and working balance among the claims of the various directly affected interest groups," which included shareholders, employees, customers, and the rest of the public. Earl S. Willis of General Electric(NYSE:GE) would say that "the employee who can plan his economic future with reasonable certainty is an employer's most productive asset." This spirit of sharing the gains of capitalism was also pushed forward by intense union pressure before and after the World War II years. General Motors(NYSE:GM), Ford's fiercest competitor, was a major target of this pressure, buckling under massive strikes in 1936 and 1945 that delivered a greater share of the company's profits into employee hands.

Today, the spirit of Ford's generosity can most clearly be found at Lincoln Electric(NASDAQ:LECO), which has been praised for its desire to share massive bonuses with employees who enjoy similarly protective employment policies. However, the eight-hour day was enshrined into law for hourly wage-earners by the Fair Labor Standards Act of 1938.

Ford remained profitable enough to avoid going public until 1956. From the time Henry Ford implemented the $5 day to the company's IPO, seven automakers (including two truck makers) were added to the Dow Jones Industrial Average(DJINDICES:^DJI). Three survived on the index until Ford's IPO. Ford, unlike any of these Dow components, has never undergone significant financial restructuring, which might include a bankruptcy, a divestiture of core assets, or being acquired. Perhaps there's something to that business philosophy after all.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights.

Author

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.